What is econometric modelling?

Tom Hunt | 03 March 2017

Data and statistics can help you see what factors and activities really affect your bottom line and by how much. This is called econometrics. How could it benefit you?

Forecast your future

For businesses, complex ecometric models can help to answer questions about what really drives a company’s key KPIs, such as volume, value, market share and gross margin. After all, few companies really understand the external forces that affect their industries or their brands.

Marketing mix modelling is one way to use econometric methods — it involves analysing all marketing inputs over time to arrive at an optimal allocation. For example, what’s the correct amount to spend on television advertising compared to the radio or the internet? Should a company invest money in more salespeople or in more advertising? What is the impact of promotional spending? With the right approach you can find the right answers.

Answering the big questions

The first step to making marketing mix modelling work, of course, is to have good data. You need to define all the parts of the marketing mix that might have an impact on sales. You need to review the state of your existing marketing data on these activities and close the gaps where they exist. You also need to set up ongoing processes to collect, clean and store the data; and develop the history that will help provide the patterns the model will identify. And then, finally, begin modelling.

With everything in place, econometric models can enable businesses to forecast demand by examining all the economic factors involved. For example, econometric analysis revealed that the growth in the number of women working in the US played a major role in the growth of the restaurant industry from 1950 to 2000. But other variables were at work too: rising incomes made eating out more affordable and greater levels of car ownership, especially among teenagers and college students, all translated into higher restaurant sales.

Understanding the economic variables that underlie demand makes it possible to forecast the future of an entire industry. What happens to your company if the price of oil plummets, or if more women re-enter the workforce after having families?

It’s obviously not a simple and straightforward analysis, but having the right data and knowing how the global winds of change are shifting can stop a business from suffering huge setbacks. Just ask BlackBerry or Kodak about the impact of the smartphone revolution.

Find out more

Econometric modelling can deliver a massive benefit to businesses that want to plan forward and avoid major disruption. Get in touch with our experts and we’ll explain how we can bring this benefit to you. 

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